Investors Wait Warily for Europe Bank Rescue

Sunday

Investors fear that the bank rescue plan being negotiated by European officials will not be large enough to solve the problems stemming from the sovereign debt crisis.

After negotiating through the weekend in Brussels in search of a comprehensive solution to the Continent’s sovereign debt crisis, European leaders reported progress on the framework of a broad rescue package.

If, as the leaders have pledged, the final details are announced when the summit meeting wraps up on Wednesday, it could quell the worst fears of investors by taking the risk of a financial collapse off the table.

But if the talks break down, some investors said Wall Street might need to brace for a repeat of the turmoil that followed the Lehman Brothers’ downfall in 2008.

“If Wednesday comes and there’s no real progress, we’ll see a riot in the markets,” said Mark D. Luschini, the chief investment strategist at Janney Montgomery Scott. “We need at least some broad schematics.”

European officials appeared to reach an agreement on Sunday evening that the size of the bank recapitalization plan would be about 100 billion euros ($138 billion).

But more has yet to be decided. Officials still had no final answer on how they might increase the firepower of a separate euro zone rescue fund known as the European Financial Stability Facility. Nor had they reached agreement on how steep the write-offs would be that holders of Greek debt might be required to take.

Expectations among investors have been modest. Many said they were not necessarily expecting to see a detailed solution come out of the meeting, but hoped to see signs of significant progress.

“I think we will get something; it will probably be half-baked and it will probably give us two to three months of room to figure out the next steps,” said Jaime Valdivia, head of global emerging markets research and strategy at BlueCrest Capital. “If we get something mediocre out of the euro zone, markets can climb higher because the expectations have been so low.”

Even as European officials suggested that $138 billion would help the banks shore up their balance sheets, investors were still trying to assess the severity of the banks’ problems.

There are doubts that $138 billion will be enough to cushion the blow from big losses on Greek debt and that of other fiscally troubled European nations.

In July, banks and other institutional investors agreed to take losses of about 21 percent on Greek debt.

But as Greece’s economy has deteriorated, some policy makers are now suggesting that banks will need to take much bigger losses, perhaps as much as 60 percent.

Greater clarity about the extent of the problem could remove some of the fear hanging over the markets, many investors said.

“There are rumors flying all over the place on how big the recapitalization needs to be — from 100 billion to 400 billion euros,” said Christopher Orndorff, who helps oversee global fixed-income investments at Western Asset Management.

“I think the number that they come out with needs to be a credible number,” he added.

Milton Ezrati, a senior economist at Lord Abbett & Company, said, “Even if they say the losses are going to be a larger number, at least people would know where the line is.”

Since the summer, the markets have swung wildly with each burst of news from the Continent. As reports emerged last week that European officials were nearing a deal on a rescue plan, the Standard & Poor’s 500-stock index rose 1 percent.

Asian markets rose on Monday morning, but that was partly a result of a report showing that Japan’s exports had increased more than expected. The Nikkei 225 in Tokyo was up 1.5 percent, while the S.& P./ASX 200 index was up 2 percent.

Even if the recapitalization plan is seen as credible, there is still the question of whether the banks will be able to raise money without disrupting the markets.

The plan under discussion calls for banks to turn to private investors before tapping government-backed funds.

A similar arrangement was used successfully in the United States after stress tests in 2009. There is concern that European banks may find it difficult to raise capital from private investors and instead start selling assets and spark a fire sale.

“The global economy could take another hit,” Mr. Valdivia said.

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